The Capitol of Meritocracy is Silicon Valley, Not Wall Street

The thing that stood out for me the most about Twilight of the Elites, Chris Hayes's brilliant new book about America's ongoing crisis of authority, is that he barely mentions Silicon Valley. That's partly a reflection of my own background. I have a job writing about tech policy and a brother starting his own tech company, so Silicon Valley looms large in my imagination. But still, if you're going to write a book arguing that America suffers from an excess of meritocracy, you really ought to say something about one of the nation's most self-consciously meritocratic industries.

Instead, Hayes focuses on two other institutions that pride themselves on nurturing the best and the brightest: Wall Street and the Ivy League. A half-century ago, the nation's elite universities began using the SAT, transforming themselves from insular training grounds for the children of the WASP elite into institutions that attract bright kids from a wide range of backgrounds. And in the process, they adopted a cosmopolitan, self-justifying ideology: that elite institutions should choose the nation's best and brightest—who they naturally assumed to be themselves—and put them in charge.

Wall Street shares this ideology, and indeed Wall Street and the Ivy League have a deeply incestuous relationship. The nation's top financial firms recruit heavily from top universities. Many Ivy League graduates who don't go to Wall Street wind up as elite journalists or civil servants, giving the nation's banks extraordinary political clout. The result is a self-involved, self-congratulatory ruling class that increasingly dominates the nation's politics.

They have produced what Hayes terms the "fail decade." Hayes views the long string of failures that typified the aughts, from 9/11 to the financial crisis, as the inevitable result of the meritocratic ideology. I think a better explanation is that the elites of the Northeast corridor have never been as meritocratic as they thought they were.

Real-world Results

Silicon Valley is at least as obsessed with the meritocratic ideal as the Ivy League and Wall Street are. But Silicon Valley's conception of merit is more closely tied to real-world results. At a firm like Google, "merit" means the ability to create good software. Because successful tech companies must satisfy millions of finicky users, the difference between good software and bad software becomes apparent rather quickly. Facebook succeeded where Friendster and MySpace failed largely because Mark Zuckerberg was a more talented programmer—and better at hiring talented programmers—than the guys who ran the other sites.

The meritocracy of the Ivy League and Wall Street are much more loosely tethered to reality. The SAT measures a certain kind of raw intelligence, but it does a poor job of measuring characteristics like imagination and resourcefulness that may be important for real-world achievement. And once you convinced an Ivy League admissions office to take you, the standards become much more subjective and forgiving. As for Wall Street, the volatility of financial markets makes it almost impossible to distinguish genuine talent from dumb luck. So while there are certainly smart people working on Wall Street, there's no particular reason to think the smartest rise to the top.

Silicon Valley is meritocratic not only within institutions, but between them as well. Firms that stop producing great products—like Yahoo and HP today—experience precipitous declines in profits and market share. The institutions Hayes focuses on don't have this characteristic. The most prestigious universities in America have been at the top of the heap for centuries. Wall Street firms may have been driven by objective performance at some point in the past, but that's obviously not the case in the era of Too Big to Fail.

In this sense, Wall Street and academia are merely "play meritocracies." The people who run Wall Street firms have convinced themselves that they're selecting the most talented people they can find, but a high SAT score and a degree from Harvard is only weakly related to talent for the kind of work Wall Street firms do (I'm not sure such "talent" exists at all, but that's a subject for another post). So the Wall Street version of meritocracy is more about making people on Wall Street feel good about themselves than it is about improving the performance of Wall Street firms. Unsurprisingly, this leads to systematic over-confidence and groupthink. And in 2008, it led to disaster.

A Growing Pie

The IT industry has another important advantage over most other sectors of the economy: a growing pie. Technological progress is rapid enough that there are lots of opportunities for new firms to exploit. Good engineers take it for granted that they'll always be able to find work, because there's a seemingly inexhaustible demand for better software.

Since the turn of the century—and especially since 2008—most of the other sectors of the economy have not been so lucky. And this offers an alternative explanation for the deep pessimism that is the central theme of the book. It's far from obvious that the list of catastrophes Hayes christens the "fail decade"—September 11, Enron, Hurricane Katrina, the financial crisis, Catholic sex abuse scandals, steroids in baseball—are all that unique. For example, think of the 1980s, which had the Iranian hostage crisis, double-digit inflation, a severe recession, the Challenger explosion, the Iran-contra scandal, the Savings and Loan debacle, and the 1987 stock market crash.

If the 1987 stock market crash had set off a severe recession, you could imagine a smart young pundit writing a book in 1992 about how the "fail decade" of the 1980s had discredited the nation's elites. Instead, the 1990 recession was relatively mild and was followed by another decade of economic expansion. So we tend to think of the 1987 stock market crash and the S&L crisis as minor setbacks with no broader significance.

Hayes seems to believe that the growing corruption, incompetence, and social distance of our elites has precipitated a series of crises. But it's worth considering that what's new is less that today's elites are less competent or empathetic than their predecessors, but rather that responsible, honest governance becomes more difficult when the economic pie stops growing.

It's easier to succeed honestly during good times, so the elites who run important institutions face less temptation to lie, cheat, and steal to hide their failures. And when an institution does fail during good times, most people are able to quickly find other opportunities. Such failures don't tend to produce crises of confidence. If it were revealed that executives at Yahoo or HP had been cooking the books, few people would take that as a sign of systematic problems with the technology industry.

Of course, these two explanations aren't mutually exclusive. Most obviously, the depth and severity of the current recession can likely be raised at the feet of the Federal Reserve's tight money policies. Maybe there's an alternate universe in which President Obama chose a more dovish Fed chief in 2010, allowing him to coast to an easy victory in 2012. In that universe, Hayes probably wrote a book on another topic.

So while I have some sympathy for Hayes's arguments for a more progressive tax system, I think our most urgent need is for policies that will lead to a growing economic pie. First and foremost, we need the kind of economic expansion that only easier money can produce. Beyond that, we should dismantle legal regimes, like exclusionary zoning, occupational licensure, immigration restrictions, and patent law, that limit economic opportunities. We should be less concerned with fixing any particular institution and more concerned with ensuring that no particular institution has a stranglehold over the nation's economy.

In an economy where new institutions and opportunities are being created on a regular basis, producing broad-based prosperity, the corruption and venality of any particular set of elites doesn't matter very much. Conversely, a stagnant rentier economy is likely to be less, not more, hospitable to the kind of redistributionist politics Hayes favors.

Twilight of the Elites is a engaging, insightful book. I finished it in less than 24 hours, and I encourage you to pick up a copy.